My wife has custody of her grandaughter and both live with me, we file separately. Am I considered a relative? I ask becaue my income is higher. Who can claim as a dependent?

[xmasbaby0]

A step -parent or step-grandparent can claim a child as a dependent if the child otherwise meets the criteria to be claimed.   So.....perhaps you can claim the child.

But...do you realize that when you file married filing separately you lose some of the child-related credits that you can get if you file a joint return?   If you file MFS, you cannot get the childcare credit, education credit, earned income credit, and your income is lower for the additional child tax credit.

IRS interview to help determine who can be claimed:

https://www.irs.gov/help/ita/who-can-i-claim-as-a-dependent

If you were legally married at the end of 2025 your filing choices are married filing jointly or married filing separately when you prepare your 2025 return.

Married Filing Jointly is usually better, even if one spouse had little or no income. When you file a joint return, you and your spouse will get the married filing jointly standard deduction of $31,500 (+ $1600 for each spouse 65 or older)  for 2025. You are eligible for more credits including education credits, earned income credit, child and dependent care credit, and a larger income limit to receive the child tax credit. 

If you choose to file married filing separately, both spouses have to file the same way—either you both itemize or you both use standard deduction. Your tax rate will be higher than on a joint return.

 Some of the disadvantages of filing separately include: 

You cannot get earned income credit, 

You cannot get education credits or deductions for student loan interest. 

You cannot get the childcare credit

You have a lower amount of income on which to base the refundable additional child tax credit

85% of your Social Security benefits will be taxable even with no other income 

The amount you can contribute to a retirement account will be limited.

Capital loss deduction is less than if you file jointly

You cannot get the $6000 senior deduction

You cannot get the deductions for overtime or tips

 If you live in a community property state, you will be required to provide additional information regarding your spouse’s income. ( Community property states:  AZ, CA, ID, LA, NV, NM, TX, WA, WI) and your returns become very complicated.

 If  you are using online TurboTax to prepare your returns, you will need to prepare two separate returns and pay twice since with online, you get one return per fee.

https://turbotax.intuit.com/tax-tips/marriage/should-you-and-your-spouse-file-taxes-jointly-or-separ...

https://ttlc.intuit.com/turbotax-support/en-us/help-article/income/getting-married-mean-taxes/L2Rgma...

https://ttlc.intuit.com/turbotax-support/en-us/help-article/taxation/married-filing-separately-commu...

[Mike9241]

That depends on how you are related to her granddaughter. 

the code says to claim the child as a qualifying child, they must be your 

(A) child or a descendant of such a child (such as a grandchild), or
(B)brother, sister, stepbrother, or stepsister or a descendant of any such relative.

the higher agi test for who can claim the child only applies if the child is your qualifying child. 

your wife has the right to claim her regardless of your income because her granddaughter would be her qualifying child, not yours, it would seem.